The opinion of the court was delivered by: FOLLMER
This is a suit by the United States of America against Erie Forge Company, a Pennsylvania corporation, seeking judgment in the amount of $ 68,517.63, representing delinquency penalties assessed against the defendant by the Commissioner of Internal Revenue for the taxable years 1835 to 1940, inclusive, because of the alleged failure of the defendant to timely file excess-profits tax returns required by the Act of Congress of March 27, 1934, c. 95, 48 Stat. 503, as amended and known as the Vinson Act, 34 U.S.C.A. § 494 et seq.
The complaint avers that the defendant, during the times herein pertinent was engaged at Erie, Pennsylvania, in the manufacture of steel forgings, ingots and castings; that defendant kept its books of accounts and made returns for federal income tax on the basis of fiscal years ending on April 30; that during the fiscal years 1935 to 1940, inclusive, defendant completed the things required of it under existing contracts with the Secretary of the Navy of the United States; that defendant made no report of the completion of said contracts as required by the Vinson Act aforesaid, until April 30, 1941; that following the filing of said reports, the Commissioner assessed excess-profits liability of $ 307,321.19 and interest thereon of $ 20,848.69, a total of $ 328,169.88, which assessment the defendant paid. The complaint further alleges that on August 30, 1941, the Commissioner assessed a delinquency penalty for each of the said fiscal years, to wit., 1935 to 1940 inclusive, totaling $ 68,517,63; and that on September 9, 1941, notice
on behalf of the United States was given to defendant of the said assessments totalling $ 68,517.63, and demand made for payment; that on July 21, 1944, a further demand was made for payment thereof; that notwithstanding the said demands, no part of the assessment has been paid.
Defendant moved to dismiss the action because the complaint failed to state a claim upon which relief can be granted, or in the alternative for summary judgment on the ground that there is no genuine issue as to any material fact and in support thereof filed affidavit of F. Edward Wuenschel, Secretary of the defendant company. The affidavit avers that shortly after March 31, 1943, defendant received a ninety day letter which, with a statement attached thereto, computed the tax, tax deficiency and penalty claimed from defendant on account of excess-profits liability under Section 3 of the Vinson Act, as amended; that said ninety day letter and statement made no claim for any delinquency penalty claimed in the complaint herein; that the defendant taxpayer petitioned the Board of Tax Appeals, now the Tax Court, for a redetermination of the deficiency; that in the Tax Court the taking of testimony was concluded March 30, 1945, and on July 19, 1945, the taxpayer's brief was filed; that on December 29, 1945, the Tax Court made findings of fact and entered an opinion and two days later a decision sustaining in toto the determination of the Commissioner; that on September 19, 1945, the Commissioner presented a motion stating that prior to the issuance of notice of deficiency he had assessed and not included in the deficiency the penalties which form the basis of the claim assessed in the present suit, and asking leave to amend the answer to include these penalties; that the Tax Court denied the motion, holding that the claim as to such penalties had not been properly raised as required by statute and rules of the Tax Court; that from this decision of the Tax Court the Commissioner appealed to the United States Court of Appeals for the Third Circuit, where on March 9, 1948, the decision of the Tax Court was affirmed.
The complaint in the instant suit was filed August 21, 1947, while the appeal aforesaid was pending before the Court of Appeals.
From the pleadings, supporting affidavit of the Secretary of defendant company, argument and briefs of the parties, there seems to be no substantial disagreement on the facts involved. Defendant having completed the things required of it under existing contracts made by it with the Secretary of the Navy of the United States during the fiscal years of 1935 to 1940, failed to make return thereof as required by the Vinson Act until April 30, 1941, when it filed with the Collector of Internal Revenue at Pittsburgh, Pennsylvania, annual reports of profits on said contracts. Following the filing of the reports, the Commissioner assessed the excess-profits liability of $ 307,321.19 and interest thereon of $ 20,848.69, a total of $ 328,169.88, which assessment the defendant paid. On August 30, 1941, the Commissioner assessed a delinquency penalty for each of the fiscal years, totalling $ 68,517.63, and on September 9, 1941, notice, as above indicated, of said assessments was given defendant and demand was made for the payment thereof by the Collector of Internal Revenue at Pittsburgh, acting on behalf of the Commissioner of Internal Revenue, and on July 21, 1944, a further similar demand was made for the payment thereof.
On March 31, 1943, the Commissioner, by statutory notice of deficiency, notified the defendant of his determination of a deficiency in the taxes for the years 1935 to 1940, inclusive, of $ 69,613.60 and a penalty of $ 17,245.22. On July 29, 1943, defendant filed with the Tax Court of the United States a petition for a review of the determination by the Commissioner of the tax and delinquency penalty assessments in the statutory notice of deficiency dated March 31, 1943, and thereafter on July 16, 1943, filed an amended petitions, defendant claimed the assessed penalties of $ 68,517.63 were erroneously asserted and were in controversy. The Commissioner's answer to the amended petition admitted that the taxpayer claimed that the original penalties were erroneously asserted by denied that they were in controversy before the Tax Court. On March 30, 1945, a hearing on the merits was held before a division of the Tax Court, at which testimony was taken and the parties ordered to file briefs in support of their contentions. After the defendant had filed its brief with the Tax Court, the Commissioner attempted to amend his answer to include the assessed penalties
but the Tax Court refused to permit the amendment. The Tax Court sustained the Commissioner's determination as to the deficiency in taxes of $ 69,613.60 and the penalty of $ 17,245.22, a total of $ 86,858.82, which amount was paid and is not in controversy in the instant case. The Tax Court refused to consider the assessed penalties of $ 68,517.63 and was sustained by the Court of Appeals, with a motion for a rehearing later denied. The Court of Appeals posed the question before it as follows: 'The question for decision is, therefore, where abundant notice has been given to Commissioner's counsel that the notice of deficiency does not include penalties previously assessed and instead of moving to amend and extend his claim, he insists that the burden of proving the penalties not included were properly asserted is upon the taxpayer, did the Tax Court abuse its discretion in denying leave to amend the answer when the request is first made after the testimony has been concluded and the taxpayer's brief pointing to Commissioner's error has been served upon him, and the only reason given for the delay is that the Commissioner upon further consideration decided the original penalties were in controversy and should be included?' (167 F.2d 74.)
(a) that a penalty for the delinquent filing of a return is collectible at the same time and in the same manner as that part of the tax upon which it is calculated;
(b) that an assessment of a deficiency in taxes without prior notice is a mere irregularity that may be waived when the taxpayer has prompt notice of the assessment and does nothing to enforce the right of appeal to the Tax Court;
(c) that the penalties computed upon the amount of taxes shown on the returns were subject to a peremptory assessment without notice just as the taxes themselves were subject to such an assessment;
(d) the Tax Court's decision that penalties were due on the deficiencies is an adjudication of liability for penalties and therefore the doctrine of res adjudicata operates against the taxpayer as to liability for the original penalties.
On the other hand, the defendant contends that from September 9, 1941, when the Collector of Internal Revenue at Pittsburgh, notified defendant that it was liable for delinquency penalties in the amount of $ 68,517.63 no further action was taken by the Commissioner or his agents until March 31, 1943, when the Commissioner issued a statutory notice of deficiency in tax for each of the years 1935 to 1940 inclusive, in the amount of $ 69,613.60, and that in that same statutory notice the Commissioner determined delinquency penalties in the total amount of $ 17,245.22 based upon the tax deficiencies claimed to be due in the statutory notice dated March 31, 1943; that the statutory notice made no reference to the delinquency penalties previously assessed on August 30, 1941, and which are the subject of the present proceeding; that accordingly the present action is an attempt to re-litigate and reopen issues which have been decided adversely to the plaintiff by the Tax Court of the United States and the United States Court of Appeals and that under such circumstances the doctrine of estoppel by judgment is applicable; that furthermore, plaintiff is foreclosed in the present action because of the specific provisions of the Internal Revenue Code.
Under the heading 'Subchapter C- Excess Profits on Navy Contracts' the Internal Revenue Code, 26 U.S.C.A. § 650 and § 651 provides as follows:
'Sec. 650. Method of collection. If the amount of profit required to be paid into the Treasury under section 3 of the Act of March 27, 1934, c. 95, 48 Stat. 505, as amended by the Act of June 25, 1936, c. 812, 49 Stat. 1926 (U.S.C. Supp. III. Title 34, Sec. 496), with respect to contracts completed within income tax taxable years beginning after December 31, 1938, is not voluntarily paid, the Secretary ...